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Finance Act 2012

Section 31 Schedule 5: Tax Treatment of Financing Costs and Income


1.Section 31 and Schedule 5 amend the taxation of financing expenses and financing income – commonly called the debt cap.

Details of the Section and Schedule

2.The section introduces the Schedule amending the tax treatment of financing costs and income.

3.Paragraph 1 of the Schedule introduces the amendments to the provisions of Part 7 of the Taxation (International and other Provisions) Act 2010 (TIOPA) which sets out the debt cap rules.

4.Paragraph 2 makes a minor change to the definition of dormant company for the purposes of section 262.

5.Paragraph 3 amends section 276 by inserting new section 276(2A). Section 276 describes how an authorised company should be appointed to allocate the disallowance of deductions.  New section 276(2A) ensures that relevant group companies that are dormant companies throughout the relevant period of account do not need to sign the appointment of an authorised company.  Paragraph 5 introduces a similar rule for the appointment of an authorised company for the exemption of financing income through new section 288(2A).

6.Paragraphs 4 and 6 add an additional requirement to the existing requirements in sections 280 and 292 for statements of allocated disallowances and exemptions.  The additional requirement in new section 280(5A) is that a disallowance cannot be allocated against a relevant group company’s financing expense if at the time that the financing expense accrued the company was not a relevant group company of the worldwide group. There is a similar provision in new section 292(5A) for the exemption of financing income for a UK group company.  Both of these new sections ensure that financing expenses are disallowed or financing income exempted only if they accrue when the company is a member of the worldwide group.

7.Paragraph 7 inserts new section 296(2A) to amend the computation in section 296 for the failure of a group to submit a statement of allocated exemptions.  This excludes from the computation the financing income that accrued to the company when it was not a UK group company.

8.Paragraph 8 introduces new section 305A which is anti-avoidance legislation.  New section 305A applies if a large group attempts to remove itself from the application of the debt cap rules by ensuring that the group does not have any relevant group companies in the period of account.  If a group does not have any relevant group companies then it is not a worldwide group for the purposes of the debt cap.  The legislation has two conditions that have to be met before Part 7 can apply to the large group.  The conditions are in subsections (3) and (4) of the new section 305A.  The first condition is that during a period of account the group entered into a scheme and the main purpose or one of the main purposes for entering into the scheme or being a party to the scheme is to secure that the group does not contain any relevant group companies.  The second condition is that the scheme is not an excluded scheme.

9.Paragraph 9 makes a minor change to the computation of financing expense amounts under section 313.  It amends section 313(6) to allow adjustments to be made to financing expenses on a just and reasonable basis where part of the accounting period of the company falls outside the period of account of the worldwide group.  It also introduces new section 313(6A) which allows for the amount of financing expenses to be reduced to nil. Paragraph 10 similarly amends section 314(6) and introduces new section 314(6A) for financing income.

10.Paragraph 11 removes section 316(4) which provided that if there was more than one group treasury company in a worldwide group then each of the group treasury companies had to make an election under section 316 for their financing expenses and financing income to be disregarded for the debt cap.

11.Paragraphs 12 and 13 amend sections 329(3) and 330(3) by removing the reference to a transaction and inserts “accrues” so it is clear that amounts that might not be thought of as transactions, such as interest, are included in any apportionment necessary because the company was not a relevant group or UK group company. They also insert new sections 329(6) and 330(6)

12.Paragraph 14 inserts new section 331ZA into Part 7.  This section enables worldwide groups to elect out of the “small amounts” rule for net financing deductions and net financing income of group companies.  The election is made by the reporting body of the worldwide group and will apply to both net financing deductions and net financing income.  The election requires the reporting body to provide certain information when making the election such as the first period of account to which it applies, details of the UK group companies at the time the election is made and of any UK group companies that have left the group between the beginning of the first period of account subject to the election and the date that the election is made.

13.New sections 331ZA(3) – (5) specify that the election has effect until it is withdrawn or replaced by a further election.  The withdrawal of the election must be made by the reporting body of the worldwide group and must specify from when the election is withdrawn. If the reporting body of the worldwide group is the UK group companies acting jointly then dormant companies are not included in the reporting body.

14.New section 331ZA(6) requires that an election or withdrawal must be made in writing and be received by HMRC within 12 months of the end of the first period of account to which the election applies or for which the election is withdrawn.  New section 331ZA(7) requires that the notice of election or withdrawal should be signed by the appropriate person.  New section 331ZA(8) provides the definitions of “appropriate person”, “relevant time” and “specified period of account”.

15.Paragraph 15 inserts new section 337(2) into the definition of worldwide group.  This is to ensure that the definitions of relevant group company in section 345 and worldwide group in sections 337 are not self-referential.

16.Paragraph 16 clarifies the definition of ultimate parent in section 339 to prevent foreign entities that would be partnerships if they were formed under UK law from being the ultimate parent of a worldwide group.

17.Paragraph 17 amends section 348 by inserting new section 348(6) which applies new section 348(7) if a group becomes or ceases to be a worldwide group in a period of account.  In which case new section 348(7) requires that financial statements prepared for that period of account are ignored and section 348 applies as if the part of the period of account for which the worldwide group is in existence is the relevant period for section 348.

18.Paragraph 18 introduces new section 348A which deals with how the debt cap rules apply to a worldwide group before and after a business combination or demerger.  New section 348A(1) has three conditions.  The first is that a worldwide group is a party to a business combination or demerger, the relevant event.  The second is that as a result of the relevant event there is a change in the ultimate parent of the worldwide group or any other group that is party to the relevant event.  “Party to the relevant event” has a wide meaning and includes any groups that are involved in or are the subject of the relevant event.  The final condition is that financial statements of the worldwide group are drawn up (or would be treated as drawn up under section 348 but for section 348A) for a period of account during which the relevant event occurs – the straddling period.

19.If these three conditions are met then new section 348A(2) applies Part 7 as if no financial statements had been drawn up by the worldwide group for the straddling period and section 348 does not apply to require the worldwide group to draw up financial statements for that period. Instead Part 7 applies as if financial statements had been drawn up in respect of a period of account beginning at the same time as the straddling period and ending the day before the relevant event and a second period of account beginning on the day of the relevant event and ending at the same time as the straddling period. In effect any worldwide group involved in the relevant event is required to finalise its debt cap computation for the period before the relevant event and begin a new debt cap computation from the date of that event.

20.New section 348A(3) defines “demerger” and applies the section 348(5) definition of IAS financial statements to new section 348A.

21.Paragraph 19 includes “business combination” in the list of expressions taking their meaning from international accounting standards in section 351.

22.Paragraph 20 includes “dormant company” in the list of other expressions in section 353. A dormant company is a company that is dormant by virtue of section 1169 of the Companies Act 2006 and which is not subject to transfer pricing adjustments arising under section 147.  The definition also includes non-resident companies that are dormant under legislation equivalent to section 1169 of the Companies Act 2006.

23.Paragraph 21 introduces a power to make regulations where a change in accounting standards effects how the ultimate parent of a group presents or discloses amounts in its consolidated financial statements.  The power is to enable regulations to be made particularly in response to expected changes to International Financial Reporting Standards 10, 11 and 12.

24.New section 353AA allows the regulations to amend Part 7 if there is a relevant accounting change.  A relevant accounting change is a change in the way that a company is required or permitted to present or disclose amounts in its consolidated accounts. A change in accounting standards includes the issue, revocation, amendment, recognition or withdrawal of recognition of accounting standards by an accounting body.  The regulations may include an election.  New section 353AA(5) allows the regulations to apply to a pre-commencement period which is defined as an accounting period or part of an accounting period that begins before the regulations are made.  This will enable the regulations to apply to early adopters of the changes in accounting standards if necessary. The regulations will be made under the draft affirmative procedure or negative procedure depending on whether or not they have the effect of increasing any person’s tax liability. New section 353AA(9) contains definitions of “accounting body”, “accounting standard” and “pre-commencement period”.

25.Paragraph 22 gives the commencement dates for the amendments.  The power to make regulations where accounting standards change has effect for any change of accounting standards on or after the date of Royal Assent.  All other amendments apply to periods of account of the worldwide group ending on or after the date of Royal Assent.

Background Note

26.Finance Act 2009 (FA) 2009 introduced a package of changes to the taxation of companies on their foreign profits.  This package included the introduction of a measure to restrict the interest and other finance expenses that can be deducted in computing the corporation tax payable by UK members of a worldwide group of companies.

27.The debt cap rules introduced as Schedule 15 to FA 2009 have now been rewritten as Part 7 of TIOPA 2010.  They broadly operate by requiring UK groups to compare their UK financing costs, as calculated under the Schedule, with the finance costs of their worldwide group.  If the UK costs exceed the worldwide costs then the UK companies do not get any relief for the excess.

28.Discussions with industry have identified that some amendments to the debt cap rules would be needed.  A number of changes were made in Finance (No.3) Act 2010 but further issues have since arisen.

29.The current Schedule incorporates a small number of changes that arose from consultation with groups and their representatives.

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